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Exorbitant Privilege

True State of the Economy

Monday June 27, 2011

by: Dr. Kirk Elliott - API Contributor

I recently read a book by Barry Eichengreen titled “EXORBITANT PRIVILEGE.”  Eichengreen is a globalist, but I read it because of his contrary position to my worldview.  In this book he discusses how the days of the U.S. Dollar as the world’s reserve currency are numbered [I AGREE].  “Historically, the leading international currency has always been issued by the leading international power.  Nothing threatens that country’s existence . . . The leading power also has the strategic military capacity to shape international relations and institutions to support its currency”  (pp.  123-124).  The U.S. is losing ground rapidly as the world’s economic superpower.  We still have the strongest military on the planet, but it’s not an either/or scenario.  To maintain monetary supremacy a country needs BOTH!

In economic terms the value of something goes down when supply increases or when demand decreases.  China dumping U.S. Treasuries will INCREASE the supply while our massive $14+ Trillion dollar debt is DECREASING DEMAND.  Uh, oh . . . That’s a double whammy for the U.S. Dollar.  Hold on folks!  This is going to be a nasty ride—a really nasty ride as our currency fades into the sunset as a viable currency.

So how does the United States generate more demand for the U.S. Dollar when its value is sinking rapidly and we are losing credibility quickly across the globe?  Easy—they need to raise interest rates!

Oh wait . . . not so easy.  Just because this is what they did in the early eighties when the U.S. Dollar stunk, doesn’t mean they can easily do it again.  This time, we are in debt up to our eyeballs.  Consumers, municipal governments, state governments, the federal government, and corporate America . . . WE ALL ARE!  Therefore, raising rates will pinch everyone living at the margin, which means everyone who is struggling to make ends meet will get crushed this time around and the unintended consequences of fixing the U.S. Dollar will destroy our national economy.  But then again, printing money like there is no tomorrow and creating hyperinflation will ultimately destroy the U.S. Dollar, our republic, and our economic, political, and religious freedoms.  History has shown that when we become too dependent on the state, we become willing to vote away our freedoms in exchange for perceived safety.

On Monday, April 18th S&P made it known that “the emperor has no clothes.”  Consider the following statement by S&P as reported in Bloomberg, “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns,”  (Source).  In the same Bloomberg article, the S&P report also stated the following: “We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013.”  This is the precursor to a credit downgrade within the next couple of years.  When that happens the bottom will fall out of the U.S. Dollar, and life, as we know it will change overnight.

Also, in another Bloomberg article from Monday the 18th, People’s Bank of China governor Zhou Xiaochuan stated that China NEEDS TO REDUCE IT’S FOREIGN-EXCHANGE RESERVES as they are in excess of the level the nation requires.  (Source).  China is the not-so-proud owner of about $900 Billion in U.S. Treasuries.  The total of their foreign-exchange holdings topped $3 Trillion USD in March, so when they are now forced to liquidate some of their foreign-exchange holdings it goes without saying that the U.S. Dollar will be a large portion of this liquidation.  Zhou is warning the United States that it will no longer be buyers, but sellers of U.S. Dollar denominated assets.

So, if demand is slipping for the dollar, and its fate as the kingpin of currencies is sealed, what comes next?  Eichengreen doesn’t believe it will be the Euro.  He doesn’t believe it will be a SDR system either because deep and liquid markets where SDR claims have not been developed yet (p. 138).  The U.K. and Switzerland are too small, and China is still too far away from the Remnibi being a viable option.

Eichengreen seems to believe that we will enter into a system of a multiple currency reserve system since we live in a multi-polar world [I DISAGREE WITH THIS].  This seems difficult, and the solutions are not set-in-stone because of the global economic turbulence.  A system of regional currencies, or a multiple reserve system would be very difficult to manage, and it still doesn’t eliminate the problem that globalists see, and that is the turbulence that comes from people shifting assets from one currency to another.  In a world where there are hundreds of currencies there is a lot of choices.  In an Eichengreen world of just multiple big currencies, the inevitable is that the smaller currencies will be swallowed up and integrated into the larger ones, thus creating more opportunity for corruption and manipulation.  I really see only one solution.  That is a single reserve currency, but not from a country.  The new reserve currency will be a global currency.  This eliminates all arbitrage, manipulation, and boom/bust cycles, but what it does do is CONCENTRATES POWER, and then an entirely new set of problems (much worse than a currency crisis) is looming.  The ability to control people’s lives is the globalists dream.  This is where I believe they are taking us.

Time will tell when all of this happens.  In the meantime, the USD is still the big kid on the block, and should remain in that position due to a void of other viable options but our time in the sun is coming to an end soon.  When that day happens if you haven’t protected yourself it will be too late.  Take action now.  Pray, protect, preserve.  Just act!  This window of opportunity to take advantage of a bad situation will not last forever.

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